Utility tax battles tap into city plans
CITY HALL — Faced with the possibility of losing $12 million in revenue, the City Council must scale back on some of the spending priorities outlined in its $448 million spending plan, which is expected to be approved tonight during a special budget session.
In attempts to make up for the potential loss, City Hall’s Finance Department will recommend freezing the hiring of new employees for select city departments over the next six months. Staff will also recommend the transferring of funds dedicated to environmental mitigation, capital improvement projects and bond payments into a reserve fund, totaling $8.2 million.
The reduction in spending is largely the result of a battle being waged in courtrooms across the country, with cities fighting the Internal Revenue Service and the telecommunications industry over the Utility Users Tax, or UUT.
The UUT is a 10-percent tax applied by City Hall on electricity, natural gas, telephone (both land lines and wireless), cable and water/wastewater services. The total UUT generates more than $31 million in revenue for the city’s General Fund, with $12 million coming from the telecommunications portion.
On May 25, 2006, the IRS issued a notice that it intended to stop applying the Federal Excise Tax to nearly all telephone communication services, except local, leaving just a quarter of services as federally taxable.
The Treasury Secretary has urged Congress to repeal the excise tax completely, as it only affects a small segment of the telecommunications industry now that long distance and wireless services are no longer included. There are two bills circulating through Congress that would accomplish the repeal, according to a city staff report.
If those bills are approved or even judges continue to rule in favor of the telecommunications industry, the city stands to lose 5 percent of its General Fund, according to Steve Stark, City Hall’s finance director.
In preparing for the worst, Stark has recommended stashing a reserve of $8.2 million for this coming fiscal year, meaning the City Council will have to cut back in other areas to fund the rainy-day account. Elected officials are expected to debate which cuts to make tonight.
“It’s all part of the conservative way in which we plan for the future,”Stark said of his recommendation for a strategic reserve. “If something does happen, which we don’t expect that it will this year, we won’t have to react immediately. We’ll have funds set aside for the year so we can study any potential impacts, find replacement revenues, and if we have to, make budget or service reductions that have a minimal impact on our residents.”
One department that will not expect a hiring freeze is the Santa Monica Police Department, which will receive four more park rangers this coming fiscal year, which begins July 1.An extra security officer for the city’s libraries will also be added, said City Manager Lamont Ewell, who vowed to make public safety a top priority.
“These are all conservative estimates and I don’t expect the hit to be as much (as $12 million),” Ewell said. “Our hope is, in January or February, we’ll have some more clarity with respect to some litigation … We’ve prepared for the worst-case scenario.”
Ewell said all positions that have been budgeted need to be filled to deal with the deferred maintenance and the city’s infrastructure needs, “but the reality is I’m going to have to look at all positions to see which ones will bring more efficiency in the delivery of services and which ones are our highest priority, such as public safety.”
City Councilman Ken Genser said the council needs to “be very concerned” with the potential loss of the UUT. While it will most likely approve of the Finance Department’s recommendations on delaying the hiring of new employees and the transfer of funds, Genser said the council will have more challenging questions to consider if UUT is eliminated.
“It won’t be terrible this year, but if we do lose the tax and the economy doesn’t grow to cover the loss, we’ll have some very difficult choices ahead.”
The news isn’t all bad. City Hall can expect to see an increase in General Fund revenues, reflecting increases in summer camp enrollments, to the tune of $315,000. This increase will be offset by a $200,000 reduction in revenue expected to be received from the Planning Division due to a review of fees. The total revenue increase is $115,000.
Stark said the council is also looking to spend a little more money than previously budgeted — $2.6 million worth. Much of this — $250,000 — will pay for the Building and Safety Division to meet next day turnaround on inspections. Another $228,000 will cover the increased cost of summer camp enrollments, while smaller amounts will be spent on the annual fireworks show at Santa Monica College ($15,000), and for council members to become members of the Santa Monica City Employees Medical Trust ($71,568).
Other funds reflecting expenditure adjustments include grant, water, waste-water, vehicle management, information technology replacement and services, and the Civic Auditorium fund — totaling $355,726.
Originally published in the Santa Monica Daily Press print edition on June 20, 2006. Read the original PDF.